Rising pension deficits leave some universities at risk of insolvency

Rising pension deficits and falling international student numbers caused by Covid-19 mean an estimated 13 universities could face insolvency, according to research from the Institute for Fiscal Studies (IFS).

The research, which was funded by the Nuffield Foundation, estimated that long run losses suffered by the higher education sector could fall anywhere between £3bn and £19bn, or between 7.5 per cent and nearly half of the sector’s overall income in one year.

The central estimate forecast that losses for the university sector would reach £11bn, or more than a quarter of income in one year, with more than half of these losses stemming from falls in international student enrolments this year and an increase in balance sheet provisions relating to pension deficits.

As such, the institutions that are most likely to suffer are those with a large share of international students and those with substantial pension obligations.

The IFS stated that institutions that fit these parameters tend to be higher-ranking universities, postgraduate-only institutions or prestigious arts schools.

However, the institutions judged as most likely to be at risk are those which began the coronavirus crisis in weak financial positions, which tend to be less prestigious institutions with little in the way of net assets or financial reserves.

Fieldfisher partner, Jeremy Harris, said: “Whenever an organisation goes through a period of financial stress, an often overlooked but significant component is pensions and the liabilities that comes with that debt.

“The financial difficulties currently faced by the higher education sector raise the need to review pensions costs and risks again, to ensure that pension provision is sustainable and able to weather the various storms that hit the sector over the years.”

The IFS explored the idea of a government bailout to support universities, but warned that more widespread and less targeted packages that have been proposed by some in the university sector “could cost billions of pounds without providing much support to those institutions most at risk of going under”.

IFS research economist, Elaine Drayton, said: “If the government wanted to avoid university insolvencies, by far the cheapest option would be a targeted bailout, which may cost just £140m. However, rescuing failing institutions may weaken incentives for others to manage their finances prudently in the future.

“General increases in research funding avoid this problem but are unlikely to help the institutions that are most at risk, as few of them are research-active.”

    Share Story:

Recent Stories

Managing volatility
In the latest Pensions Age podcast, Laura Blows speaks to Cambridge Associates head of European pension practice, Alex Koriath, about the Covid-related market volatility and how pension funds can prepare for the challenges ahead

De-risking options for pension schemes
In this latest Pensions Age podcast, Linklaters' Sarah Parkin talks to Laura Blows about the wide range of choice available to pensions schemes for the partial, or full, removal of their risks

Risk transfer opportunities
Laura Blows speaks to Lisa Purdy, Head of Fiduciary Distribution at Legal & General Investment Management and Gavin Smith, Pricing and Execution Director - UK PRT at Legal & General, about the impact of the recent market volatility on the bulk annuity and risk transfer market and the potential opportunities for the future

Bulk annuities during coronavirus
Laura Blows speaks to Just business development manager Prash Mehta about the impact of coronavirus on transactions